Peer-to-peer (P2P) financing is a revolutionary FinTech innovation, with the potential to address the lack of SME financing in Southeast Asia. Since traditional middlemen like bankers aren’t part of the system, it increases profits for investors and decreases resistance for SME issuers. Let’s see how the model benefits both investors and SME issuers.
Banks’ major financial model has been interest spreads – the difference between what it charges on bank financing and what it offers on your savings. Suppose A deposits RM 100 in a bank, and gets RM 3 per year on it. You, a small growing business, on the other hand, may be charged up to RM 11 per year for borrowing RM 100.
According to P2P financing – What if A just gives you the money directly?
Investing in P2P financing is like utilizing an online platform such as eBay. eBay lets buyers and sellers connect and trade goods, bypassing the need for a retailer. P2P financing is quite similar, in the sense that it connects investors and SMEs who need funds for their growth and development.
How it works
Now that we know the basic tenets of P2P financing, let’s see how it works practically.
For the SME issuer – Your business can be hosted on a P2P platform like Funding Societies, and submit an application for P2P financing. If your application for financing is approved, a group of retail investor will crowdfund the amount. Later, you will be required to make monthly payments which include principal repayment and interest charges. The best part is that you do not need to provide any collateral, like property and other assets.
You may have to provide some documents about your business, such as a business plan, financial information, purpose of funding, etc. While loans from traditional institutions may need around 2 months to process, you can obtain P2P financing within 2 weeks of application.
For the investor – Once your investment account on a P2P financing operator is activated, it is easy to start financing SMEs. For business term financing, you can expect your first repayment a month after the funds have been disbursed to the SME. Depending on the risk profile, you can earn returns up to 14% p.a.
Funding Societies’ rigorous scorecard-based risk assessment minimises the risk involved in funding. For further safeguarding, you can spread your investment across various SMEs to minimize the risk of a particular SME defaulting and taking down your rate of return. With diversification, your returns will stay positive and remain close to the expected rate of return.
There is already a good regulatory framework for the P2P industry. In fact, Malaysia is the first country in ASEAN to regulate P2P financing.
In P2P financing, not only are the returns promising, but they’re an instrument that investors can easily understand. In the long run, that can be the most important advantage of all.
A version of this article was first published on our sister company blog here.
This article was written by Funding Societies, the first peer-to-peer (P2P) financing platform in Malaysia. We provide working capital financing for small and medium-sized enterprises (SMEs); we also offer investment opportunities with returns up to 14% per year. To learn more about us, click on our website here.
You can also see our up-to-date progress and statistics in Southeast Asia here.